Asset allocation is the science of what proportion of an investment portfolio should be allocated to different asset classes. We aim to invest in appropriate asset allocations for every client to meet long-term goals by focusing on long-term performance and generating consistent and growing cash flows where possible.
We believe investors should keep a relatively simple process when implementing and monitoring investments while maintaining flexibility should circumstances change or access to cash be needed quickly. It is difficult to do this en masse and with a one size fits all approach without missing the opportunity to ensure investment portfolios are constructed with investors' specific goals in mind.
In setting a wealth management strategy, you need to consider your personal objectives and comfort level with specific investments, then attempt to achieve these goals in the most efficient way possible. Selecting a single fund, one manager or one asset class brings with it all kinds of biases and little awareness on how that investment will assist in meeting your long-term wealth objectives.
In terms of risk, most people think in terms of volatility of asset prices. Some may be excused for thinking the best way to avoid this risk is by not investing and leaving money in cash. While this does remove the risk of a drop in prices, it opens up a much more significant risk; failing to accumulate enough wealth for retirement. Long term investors can afford to ride out short term volatility if the portfolio is constructed in line with future spending objectives and buffers are in place that can take advantage of opportunities markets present from time to time.
"Take a long-term view" is often cited as the way to manage capital. We often see or hear daily, weekly and monthly returns quoted. Being able to objectively step back from the short-term and focus on what matters will make a substantial difference in the quantum of most peoples' wealth over the years ahead.
Unfortunately the long term is difficult to focus on as we're bombarded with attention-grabbing material.
Another difficult behaviour or bias to overcome is focusing on the recent past and projecting that as what could be expected in the future. This can be said of poor investments too. You just need to rewind the world to 2007 when there was very little consideration of risk, or downside, and how equities can and do fall in price. What followed was a period of deep despair in 2008, and a question of when the world was going to end in some people's minds! This period of despair is the one that remains clear in investors' minds today after many investments have largely recovered.
While we are certainly not saying we can time markets or avoid share price falls, we can say when certain parts of the world look expensive and when others are cheap. Generally when asset classes look expensive, future returns are lower, and vice versa. When prices eventually revert to more normal values it's anyone's guess, but we know that if valuations are on our side, it assists in longterm wealth management.
With these concepts and some of our key philosophical thinking in mind, we insert a word of caution for investors seeking a quick buck. Generally if it sounds too good to be true, whether it be higher than average returns, structures to save tax, guarantees to improve your financial world, then steer clear.
The people who generally make money from these schemes are not the investors but the promoters. It's important to always understand what it costs customers (upfront and ongoing), both financially (fees, taxes, transaction costs) and in time, to purchase the product or structure.
An example is gearing into property. This strategy may turn out fine for some, however you need to understand that if interest rates rise, if the property does not have a tenant or you need access to your money quickly you may end up in a worse position than was otherwise expected. Proceed with eyes wide-open.
As much as the thinking behind asset allocation shouldn't change often or on a large scale, there are now more academic words being written on asset allocation, risk minimisation and how to improve retail investors' overall financial positions at different life stages. Specifically for those leading into and just after retirement. These works come after the GFC with an awareness that asset accumulators and wealth spenders require different strategies and investments. It is also an admission by the academic and funds management worlds that there is a definite distinction between managing a portfolio for an entire industry (large pension plans) versus one or two clients.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.